Law firms in London’s financial district have weathered tough economic and political conditions to post growth, overtaking that of regional firms. However, according to new research, firms based in the City remain concerned with faltering Brexit negotiations and increased competition from professional services firms – both of which they believe threaten their future success.

The annual Law Firm Benchmarking report, which is produced by professional services firm Crowe Clark Whitehill, is in its sixth year, and collects a range of information pertaining to financial years ending in 2017, with participants ranging from larger law firms with +£50 million in revenue, to smaller firms with revenue of less than £10 million. According to the study, 92% of City law firms experienced growth in 2017, increasing by 27% since 2016. The number of companies reporting a fall in revenue had also dropped from 23% last year to 8%.

In the face of economic and political uncertainty, many firms remained cautiously optimistic about their growth prospects. This year’s 7% aggregate growth was enhanced by the news that fewer than 14% of firms experienced a decline in their top line, with the overall average rate of decline at less than 4%; levels far below the steeper drops that some firms faced just a few years ago. However, there was also a significant gap which opened up between City-based and regional firms in this year’s data.

The strongest year on year results were among firms with turnover between £10 million – £20 million who saw average growth of over 9%, while almost 1 in 5 firms with turnover below £10 million experienced a fall in their revenues. Smaller firms had a more challenging year, especially those outside of the City, and while 80% of regional firms experienced growth in 2016, 93% of City organisations saw the year yield improved results.

Profit per Equity Partner (PEP) increased for 60% of participating firms, with half of those seeing an increase of more than 10%. In contrast, less than a third of those who saw a decrease in PEP were firms with turnover below £10 million, and almost half of them were in the £20 million – £50 million turnover bracket. Smaller firms are continuing to hold onto top-tier equity and are, perhaps, more able to swiftly react to any negative change in their top line. However, again location played a role, and City firms of both sizes were more likely to book growth

By contrast, regional firms have had a more challenging year: of the regional firms that saw growth in 2017, only 28% saw revenues increase by more than 10%, compared to 33% of firms in 2016 and 52% in 2015. Last year, CCW conducted their benchmarking during the first few weeks of June, before the results of the EU membership referendum were known. With a further year’s hindsight to draw on now, and the triggering of Article 50 in March having led to the opening of exit negotiations, the report offers a key insight into how law firms think of the challenges they now face.

When respondents were asked what represented the biggest threat to their firm’s future success, there was a drastic difference in the perspectives of London-based and regional firms. A huge 43% of regional companies suggest the availability of high quality personnel is the biggest challenge they face, compared to 12% of City respondents – the lowest priority among the group. Meanwhile, the most City firms were concerned over the potential impacts of Brexit. 24% cited the UK’s divorce from the EU as a major concern, while only 9% of regional counterparts felt the same – perhaps due to the huge importance of European trade to the UK’s capital, which is currently considered the financial hub of Europe.

The UK is projected by some to stand to lose as many as 40,000 jobs in the financial services sector. While Law firms may not directly be considering a Brexodus of their own due to the faltering negotiations between Britain’s government and Brussels, many are tied to financial services firms, who are either clients or parts of their business ecosystem. Were the number of investment banking jobs to disappear from the UK at the rate predicted, it could leave many Law firms in a precarious financial position.

Regional firms were actually marginally more positive about the outcome of the country’s secession from the Union. 48% of firms in the City believe Brexit remains a net threat, while the same number of regional firms believe it will have little impact. While this gap could largely be due to regional firms being comparatively disconnected from the financial sector clients City firms depend on for substantial revenue streams, the same number of firms outside London believed Brexit presented a positive opportunity as those who anticipated a threat. 13% of regional firms believe that the geo-political changes could be either good or bad for their companies – and while those numbers combined are only the same as those who have yet to determine their opinion, their outlook is presently relatively optimistic compared to many business leaders across the UK.

New competitors

Meanwhile, increased competition also proved to be a source of anxiety for firms across the board. A majority of both City and regional firms suggested that new professional service firms provided the greatest threat to their market share, with 68% and 52% respectively. Professional services firms have continued to branch into legal services, challenging the traditional law firm structure. The same question 10 years ago would likely have found that ‘supermarket’ law firms have figured prominently in most people’s answers, but now relatively few practices see this as a major threat.

The City particularly remains a highly competitive arena for business, with those firms reporting a greater sensitivity to price competition than their regional counterparts. In part this may also be amplified by the effects of Brexit, which has seen record numbers of foreign investors in multiple sectors making the most of a low pound to export their services to the UK.

There was also a strong feeling that the biggest emerging threat to any law firm’s market share will come from other professional services firms outside of the traditional law firm structure. If we had asked the same question 10 years ago, it is likely that ‘supermarket’ law firms would have figured prominently in most people’s answers, but now relatively few practices see this as a major threat. Perhaps firms are considering the prospect of a new age of multi-disciplinary practices?

In conclusion, the researchers remarked on their findings, “The coming year is shaping up to be another challenging time for those in the legal industry as competition remains fierce and gains in market share become restricted to a smaller number of very successful firms.”